One for the Investors:
Understanding Capital Gains Tax
If you’re investing in property for the first time, it’s a good idea to get your head across Capital Gains Tax (CGT) – a little knowledge could save you a bundle.
So, what is Capital Gains Tax?
You won’t find many fans of many taxes, but especially not this one. It feels like the tax department is taking aim at your family’s wealth creation. It seems a little unfair, but the more capital gains you make (due to either a good investment or long term holding), the more tax will be applied.
In short, the legislation describes a capital gain or capital loss on an asset as the difference between what it cost you and what you receive when you dispose of it. These sums are inclusive of most costs applying to the purchase and sale – not just the amount specifically paid or received for the asset.
Even after you die, your beneficiaries will be taxed on your investment when they sell. What a rort! But it’s the reality of CGT. The Australian Taxation Office will wait many years or even decades. In fact, this tax may even be applied in certain circumstances without an asset sale, such as leaving your children an inheritance either as a superannuation payment (not exactly CGT but a tax nevertheless), or if they are living overseas at the time of your death –depending on the assets.
When it comes to calculating how much CGT you have to pay, there’s no specific rate of tax that is applied – the tax rate will depend on your personal marginal tax rate. But by understanding more about CGT, including how to calculate it and minimise it, investors are better placed to make educated decisions about their tax liabilities and the best times to sell assets.
First established on September 19 in 1985, it applies to any asset acquired after this legislation was introduced. Under the current legislation from March 2019, if the asset was purchased as an investment (as opposed to an intention to sell) and is held for more than 12 months then any capital gain (increase in value) is first reduced by the general 50 per cent discount for individual taxpayers or by 33.3 per cent for superannuation funds.
If a company makes a capital gain, then no discount is applicable. For tax payers, capital losses can be offset against capital gains before the discount and net capital losses in a tax year may be carried forward indefinitely. Capital gains for a tax payer can be netted of any normal income losses in the same tax period but capital losses cannot be offset against normal income.
So, what do you pay CGT on?
The good news is personal assets are exempt from GST (under normal circumstances, anyway). Personal assets include things like your home, car, furniture etc. CGT also doesn’t apply to depreciating assets used for tax purposes, including business equipment or fittings to your investment property.
But if you have any investment anywhere in the world, you will pay CGT on it. You can’t hide your winnings in SE Asia unfortunately. Income tax is also applied to any normal income generated or received from non-Australian assets and a tax benefit may apply if the income or capital gains are generated in a country with a double taxation agreement – like New Zealand.
When do you pay CGT?
When you sell or dispose of an asset, it’s called a CGT event. The timing is important as it will tell you which year to report your gain or loss – you may want to save a successful sale for a not so good year in business. It’s important to note, the CGT event is the contract date for disposal – not the day the sale is finalised (the settlement date).
Talk to your Accountant
It’s a little bit to wrap your head around, so if you’re planning on becoming a mad keen investor, it’s a good idea to create a plan with your accountant. You don’t want your winnings getting chewed up by the tax man.